A proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company – explain and illustrate.
Introduction:
The economy of any country runs by the activities of the people of that country. People are engaged in various types of activities such as job, business, farming etc. The business people run their business through creating various business entities which is broadly known as company. According to duhaime.org the definition of company is like this: a company is a legal entity, allowed by legislation, which permits a group of people, as shareholders, to apply to the government for an independent organization to be created, which can then focus on pursuing set objectives, and empowered with legal rights which are usually only reserved for individuals, such as to sue and to be sued, own property, hire employees or loan and borrow money[1]. Every company gives the general people an opportunity to become a part of it. The company sells shares to the general public through stock market and the general people buy those shares. By buying the shares, general people become part of the company[2]. This is not necessary that everyone will purchase the same amount of shares of the company. Some people may buy many while others may buy few. The buying patterns of the people depend on the ability of the people as well as the acceptance of the company to the people. If any company has a good reputation in the market, then general people would be interested to purchase the shares of that company in great amount3. According to the number of shares bought by the people, they are categorized in two segments: majority holders and minority share holders. Both this two types of share holders have some rights and duties. In order to run the company smoothly, management must ensure the proper balance of the rights of the majority and minority shareholders of the company. First the two types of shareholders are discussed in the proceeding[3].
Majority shareholder:
Shareholders are the people who invest in any company to purchase the share of that company and hence they become the partial owner of that company. Different types of investors might follow different strategies to invest in the companies. Some people would invest more while others would invest less. The people who invest more in the companies are called majority share holders. According to wisegeek.com, to be called a majority shareholder, a person must have more than 50 percent share of the company[4]. So this is a huge portion the company that needs to be purchased by the majority shareholders. When the people buy majority shares of the company they enjoy a wide range of rights with along with some responsibilities[5]. The majority shareholders have the right to take any major decision of the company such as selecting the board of governance. These kind of exclusive rights give the majority shareholders a power to dominate the minority shareholders illegally. The majority shareholders can change the board of governance according to the interest of them. They will elect the people who will take decision in favor of the majority shareholders. Along with these rights, the people with majority shareholders have immense liabilities. If the company faces a loss, the majority shareholders will be the greatest looser. As they are supposed to have more than 50 percent share of the company, so they are more vulnerable to the performance of the company. If the company earns a profit, the majority shareholders gain the most. On the other hand, if the company faces a lose, the majority shareholders would suffer the most[6].
Typically the majority shareholders of the company have the voting right more than anyone else in the company7[7]. They elect the people from the company who will take the responsibility of the company. Those people will try to minimize the cost of the company and will try to maximize the profit[8]. The majority shareholders can be a single individual or can be a corporation. The individual shareholder in most of the cases is the owner of any big corporation. Sometimes other company can be the majority shareholder of any other company[9]. All these majority shareholders have some exclusive rights in the company. They can take many important decisions regarding the company. What type of strategy will be taken by the company in order to make more profit is often defined by the company majority shareholders. It is often seen that the decision made by majority shareholders affect the minority shareholders interest. The majority shareholders take such decisions’ which might affect the interest of the interest of the minority shareholders adversely. So the majority shareholders need to take decisions in such a way which will ensure the right of both the parties[10].
Minority shareholders:
The minority shareholders of the company are the people who own the company in such a portion which is much less than that of majority shareholders11. Like the majority shareholders, the minority shareholders have some rights and duties. According to carrlaw.com the rights of minority shareholders on any company are as follows[11]:
Major re-organizations: The minority shareholders have the right to make any kind of amendment regarding the rules and regulation of the company. If the company needs to sell any asset or needs to buy any asset, then the company has to take permission from the minority shareholders.
Derivative actions: If the directors reject to enforce the privileges of the corporation against any executive, manager or worker, the minority shareholders can apply to the court against this decision. This action is often taken by the minority shareholders when the directors do not act in the best interest of the minority shareholders. The directors are engaged for making profit of the company. Ensuring the rights of the majority and minority shareholders is also a major activity of the directors. When the minority shareholders will find that their right is not being reserved by the directors, then they go to the court and take necessary actions.
Oppressive actions: In many cases the company acts to fulfill the interest of any particular group of people. Sometimes the company takes decisions in order to favor any majority group and to deprive the minority group. Decisions are made sometimes to take illegal advantage from the majority shareholders. All these activities are undertaken to divest the minority shareholders from enjoying the rights that they are supposed to enjoy. If the minority group finds such kind of unfair activities from the authority, then the group can go to the court and can ask for justice. In such cases, the Court has extensive powers to correct the wrong, including:
- restraining the conduct complained of,
- appointing a receiver-manager,
- amending the articles or bylaws of the corporation (even if such amendments
- would contravene the provisions of a unanimous shareholder’s agreement);
- directing an issue or exchange of shares;
Rights of the shareholders:
The companies now-a-days are trying to attract skilled employees by offering stock options. While these types of offerings can gain attention and create incentives for key employees, they also create a group of minority shareholders. It is sometimes difficult to ensure the fair treatment of this minority shareholder, especially in small, closely held corporations, where the shares are characteristically determined by the few owners who are often relatives or business associates. When majority shareholders use the attempt to dominate the minority shareholders, litigation can result.[12]
To protect against such oppressive behavior, most states’ laws in USA give minority shareholders some indisputable rights. Though the exactness of the rules varies from state to state, several common law rights have been emerged to protect all the shareholders, including those in the minority, from being dominated by the majority. On the other hand, shareholder agreements or corporate bylaws often contain protections for minority shareholders.
Because a company is a common property of all of its shareholders including both minority and majority shareholders, the majority shareholders, who most of the time control corporate management, holds a responsibility to act generously and exercise, sound managerial judgment to the minority shareholders. The basic assumption is that the majority must not oppress the minority.
“Oppression includes, but is not limited to, the misapplication of assets or the mismanagement of funds. Such behavior might range from negligent management practices that cause serious shareholder losses to illegalities such as granting “sweetheart” loans to shareholders or allowing them to use corporate funds to pay personal obligations. Further, conduct that might be harmless under one set of circumstances may be considered oppressive under another. For instance, payment of large salaries to officers might be considered reasonable during a period of high earnings, but oppressive when the officers are also majority shareholders and minority shareholders are frozen out of their share of the earnings by the large salaries.
Additionally, during transactions that significantly affect the form of a corporation, such as mergers or acquisitions, majority shareholders owe the minority a duty of intrinsic fairness. Intrinsic fairness may be shown by ensuring that the majority treats the minority equitably in the transaction and the minority receives a fair price for its shares in case of a sale or merger. Any such transaction, moreover, must take place for valid business reasons independent of the majority’s personal interests, and majority shareholders must disclose fully to the minority all facts and circumstances surrounding the transaction.
Courts take accusations of oppression seriously and use their equitable jurisdiction to even the odds. The remedies available to courts include the appointment of receivers, invalidation of or injunction against the proposed action, payment of damages to shareholders or the corporate fiscal, and in the most egregious cases, dissolution of the corporation”.
Both the majority and the minority shareholders have some common rights to enjoy. These rights are supposed to be enjoyed by the shareholders no matter how many shares they possess in the company. In most of the cases the shareholders are not aware of the rights that they hold. The more the shares any person has in any company, the more the right he/she has in that company. Fewer shares meaning the shareholders will not have much right in the company. But both majority and minority shareholders have some common rights. These are as follows[13]:
Financial disclosure: The shareholders have the right to know about the financial situation of the company. The company is bound to disclose the financial performance of the company to its shareholders. The shareholders might change their decision regarding the investment if they find the financial situation of the company poor. On the other hand they might feel interested to purchase more shares of the company if the financial situation of the company looks fine.
Dividends: Shareholders of any company have the right to get bonus from the company. This bonus can be in the form of dividend, can be in the form of cash money. The dividend is giving out shares to the existing shareholders as a bonus. The company is bound to give bonus to the shareholders.
Right shares: Sometimes the company gives right shares instead of money to the shareholders. Right share means giving a number of shares in response of having a certain number of shares to the shareholders. The value of the right share will be the same as the value of the original share. The company needs to give bonus to the shareholders either in terms of money or in terms of right shares.
Smooth functioning of the company:
Every company operates in the market to earn profit. Earning profit is the main reason for the existence of any company. To earn profit the company must need to run smoothly. Smoothly running means all the participants of the company will be treated equally. All the share holders will be treated as equal. The majority shareholders might have greater portion in the company compared to the portion of the minority shareholders. But both the share holders need to be evaluated in the same manner to the company. The opinions of both the parties need to be respected by the authority. When the shareholders will see that their opinion is being respected by the company, they well are devoted more to the company. Other than this there are many ways through which a company can be run smoothly. According to evancarmichael.com the ways are as follows[14]:
Hire wisely – Too many managers hire bodies for particular jobs rather than people to help build a future. Your company is only as good as each individual staff member’s contribution to its optimum functioning. Look for the four “C’s” of Proactive Hiring when you hire: Character, Competence, Commitment, and Community. Commitment is the motivation and willingness to diligently and consistently apply one’s high character and competencies in the work environment. Community is related to the desire to be an effective team player in skill and attitude. For every position, from receptionist to technician, hire only the best customer-satisfying managers and staff members you can recruit.
Build a team rather than your ego – Too many leaders let their egos monopolize their interactions with their staff members. Stop the pattern. Instead, trust your staff members to do their jobs. Ensure that each staff member feels that they are a highly valuable member of your team. Let each staff member know they are an integral part of the company’s end product or service to customers. Set the example for positive interaction at all times between team members.
Reward well – When you get good staff members, reward them financially and emotionally. Be sure their pay is at least at market rate. Take time often to acknowledge each staff member’s contribution verbally and with affirmative notes. The two big loyalty builders are two simple words, “Thank you!” followed by a statement of the specific action being appreciated.
Are hands on – Know each staff member’s job and how to do it. This not only gives you an automatic reserve staff member and trainer (yourself), but has an added bonus. If you show a staff member that you are willing to learn or have learned his/her job, you are communicating that you believe their work has value. Every staff member needs to know that whether they are emptying trash cans, setting the presses, or selling the large accounts, their work is worthwhile.
Make your staff members versatile through cross training – In a small company, every staff member should know how to do at least two jobs, particularly on the technical and service sides. For critical tasks, at least three staff members should know how to do each job. Invest time in cross training and you will always have a “backup substitute” on your premises who can step in when needed.
Develop all-staff operations manual – All people who serve as your temporary help deserve and need clear instructions for temporarily filling a position. To give them what they need to do excellent work for you, involve all of your staff members in the development of written guidelines and procedures for carrying out all of the functions and tasks they are responsible for in each of their positions. Develop a “group draft” and then edit it together for clarity. Have staff members use the operations manual to carry out key functions and tasks for positions other than their own. Have the persons who hold the position observe how the “backup substitute” is doing and ask them questions and coach them as they are doing it.
Conclusion:
Both the majority and minority shareholders have great contribution to any company. Each and every company of the world is consists of both majority and minority shareholders. It is true that the majority shareholders of any company has the right more than anyone else. They can take any vital decision of the company as they wish. But they always need to think about the minority shareholders of the company. The opinion of the minority shareholders is also very important for the company. No decision should be made to give advantage to any particular group of investors. If any company can assure that all the rights of all the shareholders will be preserved in the company, only then the company can run smoothly and can earn profit.
Bibliography
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http://www.articlealley.com/article_1928957_15.html
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[1] For more details see at http://www.duhaime.org/LegalDictionary/C/Company.aspx
[2] Issuing shares for the general people is one of the most effective ways of making the people a part of the company. As soon as the general people buy shares of any company, they get the ownership of the company. It may be a small fraction but still it is an ownership.
[3] Company that is showing a good performance in the market, will certainly attract many people to invest in that company. People will expect to get a higher return from that company as they take risk in investment.
[4] To see more details, see in this website: http://www.wisegeek.com/what-is-a-majority-shareholder.htm
[5] The majority share holders not only have rights to enjoy, they have a lot of liabilities as well. They are more vulnerable to the performance of the company. If the company faces any loss or earn any profit, the majority shareholders are the people who will get the most of it.
[6] It is very obvious that when the company will face any loss, the people who will have the majority portion in the company, will face the greatest loss.
[7] Voting right is the right which enables the shareholders of the company to select the representatives of the shareholders in the company. The majority shareholders have this voting right more than anyone else in the company. They have a great influence on the selection of the representatives.
[8] Earning profit is the only objective for any company to be operated. The duty of the representatives is to maximize the profit of the company and to minimize the loss. This is the main duty of the managers.
[9] In many cases the shares of any company is purchased by any other company. Company can buy the majority share of any other company. Like individual buyers, the company can also be a buyer of any other company.
[10] Both majority and minority shareholders of the company have the right to enjoy. Since the majority shareholders have most of the rights, so they have an opportunity to deprive the rights of the minority.
[11] http://www.carrlaw.com/rights-minority-shareholders.asp
[12] http://www.enotes.com/everyday-law-encyclopedia/shareholder-rights
[13] http://www.investopedia.com/articles/01/050201.asp
[14] http://www.evancarmichael.com/Leadership/2040/How-To-Maintain-A-SmoothRunning-Company-When-Facing-Tragedies.html
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